Warren Buffett’s Berkshire Hathaway Makes Big Investment Into Troubled Home Capital Group

As reported earlier today from our friends over at Better Dwelling, Warren Buffett made a lucrative deal to purchase nearly 39% of Home Capital Group shares. This would make Buffett’s Berkshire Hathaway the largest shareholder of the firm.

The deal involves a total investment of nearly $400 million with Home Capital Group selling the first batch of shares at $9.55, which is an incredible 56% discount when compared to yesterday’s closing share price. A sweet deal for the oracle of Omaha. A second batch of shares will be sold at $10.50 assuming shareholders approve the deal in September.

Berkshire will also replace the emergency C$2 billion loan previously announced, with slightly better terms. The interest rate on the outstanding balance will be lowered from 10% to 9.5% until completion of the initial investment, when it then gets reduced to 9%.

What to make of the deal?

Buffett rarely makes bad deals, and it appears he has hedged much of his downside with the $2 billion dollar loan being secured by $4 billion in mortgages. Even if many of the mortgages are fraudulent at Home Capital, Buffett has essentially bought a third of the company at half price. It’s a heads I win, tails I don’t lose much.

Home Capital Group Story Is Not Over

Having Warren Buffett invest in the company will certainly help it’s image and potentially restore investor confidence. Deposits are still down about 95% since the whole debacle so there’s a ton of work to do. Not to mention that Home Capital is still borrowing at nearly 10% and issuing mortgages at 4-5%. “Six weeks ago this company was on its back, now people think it is all fixed, it is not” -Home Capital director Alan Hibben

What It Means for Canadian Real Estate

The Canadian government and central bank is likely breathing a major sigh of relief. It was only weeks ago that a bailout was being discussed as the implications of Canada’s largest alternative lender going bust had a strong likelihood of contagion. Of course this naturally would have tightened credit big time and could have led to a significant slowdown in Canadian real estate activity as buyers struggle to obtain financing.

One thing is for sure, there’s still a lot left to the Home Capital Group saga, stay tuned..